Allright, here’s another law review article, this time out of the Oklahoma Law Review by way of Workplace Prof, complaining about the standards of review currently applied by the courts to ERISA benefit denial cases. Although I haven’t yet read it – I just finished Langbein’s on the same topic, and I’m not ready to delve into another article on the same subject just yet -the article proceeds as follows:

Part II below provides background analysis of the ERISA standard of review controversy. This Part illustrates the continuing failure of the circuit courts to produce a consistent and just claims process in employee benefit cases where courts defer to self-interested plan administrators. The analysis begins with Firestone and its pronouncement that trust law should guide review of challenged benefit claim denials.
Next, Part II argues that the lower courts have struggled to tease a clear message from Firestone’s “opaque” standard of review analysis. In particular, this Part explores the Tenth Circuit Court of Appeals’s attempt in Fought to cure this wounded process, and we describe the unfortunate failure of the Tenth Circuit to discover a trust law-based antidote to Firestone.
Finally, Part III of this comment works within the parameters of Firestone to re-introduce the historic trust law-based solution to the problem of self- dealing fiduciaries: the no-further-inquiry rule. Here the article capitalizes on prolific trust law and ERISA scholar Professor John H. Langbein’s recent examination of the no-further-inquiry rule. Professor Langbein’s analysis is adapted to support a thesis that he did not reach, by applying his discussion of the no-further-inquiry rule to ERISA benefit cases. This Part describes how the summary adjudicative process, invented by contemporary ERISA courts under the guise of deferential review, mimics the archaic circumstances existing in courts of equity that spawned the no-further-inquiry rule.
Finally, Part IV concludes that ERISA courts should apply the no-further-inquiry rule to irrebuttably counter the mischief that courts have historically presumed attach to the actions of self-dealing fiduciaries. Ultimately, by application of the no-further-inquiry rule in ERISA benefit claims, courts can, and should, return federal Article III trial judges to their role as neutral, de novo referees in plan participant claims for benefits due under ERISA.

There is an assumption, as one can see from this, in the academic literature that self-interested fiduciaries are up to no good, can’t be trusted, and won’t be caught by the current standards of review applied by the courts. Poppycock I said, in essence, here. But this emphasis on an academic and hypothetical level as to whether the applicable standards of review are appropriate raises an interesting real world question: namely, how often would court decisions reached in cases decided under the arbitrary and capricious standard (a level of review that law school faculty appear to uniformly find fault with when applied by a conflicted decision maker) be different if the court had instead applied the de novo standard of review (which the academy seems to uniformly prefer)? I wouldn’t mind seeing an article that took fifty denied benefit cases and presented the findings of such a review. With courts applying an ever more searching scope of review when applying the arbitrary and capricious standard of review than they may have done in the past, I don’t see that high a percentage of cases, either in my own practice or in the reported decisions, that would end up with a different result under one standard of review than under the other. The litigation over the case, including the extent of discovery and the expense, might change, but I am skeptical whether the outcome would be different if you changed the standard of review.

I am a little bit of a skeptic – I don’t think it has devolved yet to cynicism – when it comes to insurance bad faith litigation. Done right, a state law system of bad faith rules and rights can establish appropriate boundaries for all three sides of the insurance triangle – the insurer, the insured and the claimant. Done wrong, however, it tends to be little more than a system for imposing additional obligations and expenses on insurers beyond any that were bargained for or paid for by insureds.
Beyond that, the whole subject of bad faith litigation, including whether it is appropriate and the rules that should govern it, tends to become one of public relations and political posturing, rather than of rational legal and economic thought. This article demonstrates that exact dynamic in the context of a dispute in West Virginia over the elimination of third party bad faith claims against insurers, after years in which such claims were actionable. What jumps out at me is the assertion that a particular amount – 77 million dollars in premium reductions – of savings to the public can be attributed to the elimination of the bad faith cause of action.
Now it is beyond my skills as an amateur economist, but it seems to be that there must be enough data pre and post the ban on such claims to actually measure, at least roughly, the economic effect of banning, as opposed to allowing, such bad faith claims against insurers. It would make an interesting test case as to the economic impact, pro or con, of insurance bad faith litigation, and might be a good starting point for more empirically based and rational discussions as to whether other states should allow, or instead ban, such causes of action. This would be a nice substitute for the current state of the debate in most states over whether bad faith litigation should be allowed, which tends to consist of little more than entirely predictable and unverifiable public posturing of the type reflected in the article on the effect in West Virginia of banning such causes of action.

I have spent some time recently reading a draft version of Yale Professor John Langbein’s article, Trust Law as Regulatory Law: The Unum/Provident Scandal and Judicial Review of Benefit Denials under ERISA. For those of you who have more socially redeeming hobbies (like mowing the lawn, watching paint dry, pretty much just about anything I suspect) than reading law review articles, the good professor essentially argues that the Unum Provident problem, referenced here, shows that the current regime under which ERISA benefit claims are litigated is one giant failure and that the Supreme Courts needs to alter the jurisprudence governing denied benefit claims. For those who would like more detail on what the article has to say in full, without having to spend the time reading the article in its entirety, the abstract of the article is here.
I have a few initial thoughts in response to the article, some of which perhaps I will flesh out in greater detail in future posts if time allows. Here they are, however, in a nut shell.
One, the good professor makes the case that Unum Provident’s conduct in handling claims and the questionable conduct uncovered in investigations into its conduct show that the governing legal regime needs to be changed. Not really. To avoid the obvious fact that Unum Provident may simply be an outlier, which has already been caught by the system currently in place, Professor Langbein has to create a straw company, asserting that Unum Provident was caught, but only because it was clumsy and the regime should be fixed to protect against other companies acting the same way, only with more subtlety. I don’t see any evidence that other companies are doing this, or that, if so, they are so good at what they are doing they won’t be caught in the same way that Unum Provident was nabbed. Indeed, the professor points out that Unum Provident was partly caught by a long run of federal court decisions in which judges found Unum Provident’s claims decisions to be highly questionable under the standards of review currently in force; a different insurer trying the same thing is going to run into the same problem. Hiding from shadows is what I would call it, changing an entire legal structure on the theory that somewhere, there might be someone doing something wrong, but we don’t know about it.
Second, on a micro level, the truth is that unscrupulous claims handling of the kind described in the article is caught in litigation in the federal courts, and thus the improper rejection of a particular claimant’s benefit claim can be and is resolved successfully under the current system and standards of review. In fact, if anything, we see courts providing an ever more skeptical review of administrators’ decisions even under the arbitrary and capricious standard of review as it currently exists than we ever have, for the exact reason, I believe, of making sure no administrator is trying to hide improperly motivated decision making behind the cloak of judicial deference that is owed to an administrator who is acting with discretionary authority.
Third, on a macro level, litigation is an awfully blunt instrument for modifying long term corporate behavior, and I am skeptical that changing the standards of review that apply to denied benefit claims will have such an effect. It may well be that the combination of the current standards of review, which do contain effective protections of the rights of individual claimants, with a vigorous state level regulatory apparatus is the correct way to proceed. This combination did, after all, successfully handle the Unum Provident problem.
Fourth, I am not convinced that the Unum Provident problem really shows, as the article wants it to, a problem with courts relying on market place forces to provide some protection against biased and self-serving decision making by administrator/insurers. Courts assume that in the long run, such companies will be hurt by such conduct when competing for business in the marketplace, and that this will have a deterrent effect. Critics of this thinking like to point to Unum Provident and its size in the market to prove otherwise. But I am not sure it proves anything of the sort. As the professor points out, Unum Provident is the product of a series of mergers and acquisitions, and one has to ask whether a company that stands accused of the type of misconduct that Unum Provident is charged with could have grown so large organically. Unum Provident may well show that the problem/hole in the system is in the mergers and acquisition regime, not in the benefit review regime.
Finally, a quick note of thanks to Workplace Prof Blog and Benefits Blog, without whom I would never have noticed the professor’s paper, since I generally don’t spend time surfing faculty websites (their blogs, yes, but not their websites). You can find a link to the the actual paper, by the way, here.

Here’s an interesting story today about the Massachusetts Attorney General challenging the rate increases that have been approved for the state’s homeowners’ insurer of last resort, the FAIR plan. The problem is one that is riling coastal homeowners’ insurance markets up and down the eastern seaboard, namely the rate increases being imposed by insurers – and in particular state mandated insurers of last resort for homeowners who cannot obtain insurance in the private market – on coastal properties so as to account for hurricane risks. I have talked before about the real question with regard to what rate increases the FAIR plan should be allowed to impose, and the consumer and sometimes political opposition to what would otherwise appear to be appropriate increases by the FAIR plan and similar plans. The issue that it presents is to a large extent a question of the degree to which we should be comfortable letting the market set the rates, or even the availability, of insurance for such homes, or whether the market for such coverage should be distorted by state regulated insurers and the pressure on them to charge less than may be correct from an actuarial perspective.
While one might initially be inclined to view the Attorney General’s response to the rate increases by the FAIR plan as being exactly this type of political pressure to distort the rates away from what a private carrier would charge for the same coverage, it is not that easy to immediately dismiss his assertions that there are problems with the hurricane models used to support the rate increases, at least without further independent investigation of that charge. Having saved a collapsing health insurer from dissolution some years ago, he has a certain credibility on these issues. And as a lawyer, and in particular an insurance coverage specialist, I am happy to consider a challenge to an insurer’s decision that can be decided on the basis of a careful analysis of an insurer’s underlying factual reasoning and evidence, which is all the Attorney General seems to be asking for.

Here is a nice post on whether claim reserves are discoverable in insurance coverage or bad faith litigation, with some case law on the topic as well. The discovery of claim reserve information is one of those issues that is a consistent point of dispute from one coverage or bad faith action to the next. In fact, given how much it comes up, it is kind of amazing the amount of time and money spent – some would say wasted – in insurance coverage and bad faith litigation over discovery issues such as this one. Some of that, it is fair to say, is driven by the fact that insureds and claimants in such lawsuits are often convinced there is some document somewhere in the insurer’s files that is the key that will unlock the entire case, and are determined as a result to obtain every single piece of paper possessed by the insurer that they can grab hold of. In truth, there almost never is such a key stone document, and even when there is, you can be pretty certain it isn’t going to be found in the claim reserves or in similar information, such as reinsurance documents, that are likewise routinely the source of a tug of war over production and discovery in coverage and bad faith litigation.
But the other part of the problem is that what we may really need is some sort of federal rules of evidence, insurance coverage and bad faith subsection (hopefully then adopted by the states as well as part of their own evidence codes, in states like Massachusetts that don’t automatically follow the federal rules of evidence), that synthesizes all the case law on these types of issues that arise repetitively in coverage or bad faith litigation, and sets down a rule once and for all on them. In this tidy little daydream for a Friday morning, we could then all stop relitigating the same discovery points over and over again, frequently with little more than a change of judge and forum from the last time we argued over them.

I have talked elsewhere, including here and here, about the extent to which market forces can be expected to protect against conflicted decision makers in ERISA benefits litigation, and my preference for the position of courts such as the First Circuit, who recognize the central role such forces should play in devising the appropriate legal regime that should govern this situation and these types of cases. Many, obviously, do not agree, and believe that the long term marketplace effect of bad conduct can’t possibly have enough effect to deter bad actors, and it appears that the judges of the Ninth Circuit agree with this line of thinking. To those, I raise the question of whether being entirely thrown out of the market because of long term misconduct in handling employee benefit claims, as this article discusses, would be enough evidence that the market will punish the bad and reward the good, at least over time. It would, at a minimum, be ironic if the largest state in the Ninth Circuit proceeded in the manner discussed in the article and provided graphic evidence of a marketplace punishment for misconduct of this type, on the heels of the Ninth Circuit itself finding that something else is instead needed to deter such conduct.

Well, this is an interesting report, and though I am not quite sure exactly what to make of it, it falls within the general rubric of this blog. As Robert Ambrogi sums the reporting and blogging on this story up here, a law firm has been hit with an eighteen million dollar malpractice verdict based on the failure of a health plan; the amount of the verdict is premised on the amount of unpaid claims outstanding under the plan. Of interest to me is the side carnival, which is the defendant law firm apparently claiming that its professional liability insurer committed bad faith by failing to settle the claim within the one million dollar limits of the firm’s professional liability insurance. Anytime anyone suffers a verdict in excess of their insurance coverage, it is reasonable to look first to whether the insurer should have seen that coming and settled the case before a verdict could be taken on the case that would expose the insured to the possibility of having to pay damages greater than the amount of the existent insurance coverage. But though the law on whether an insurer can be liable for bad faith failure to settle within the policy limits under such a scenario varies from jurisdiction to jurisdiction, there are some questions that always have to be answered to consider whether the insurer should have settled the case and avoided the risk of such an excess judgment. These include whether the insurer should have seen that the case was worth the policy limits in settlement, or should have foreseen the risk of a judgment exceeding the policy limits if the case was tried to a verdict.
Beyond that, in a case such as this one where presumably the hard numbers of the loss were always obvious and so you could always know that there was a risk a verdict would exceed the insurance coverage, is that enough to require the insurer to settle the action? Probably not, since in deciding whether to settle the action or instead risk an excess verdict in that situation, one normally still has to consider how likely the case is to end up with such a large verdict. For instance, should the law really require an insurer to settle, rather than allow a trial, just because the claimed damages are sky high, if the likelihood of those damages being recovered is minimal? The likelihood of losing or winning at trial obviously always factors into the settlement negotiations of any experienced lawyer or other negotiator.
And for that matter, there is the question of why the case did not settle before a verdict came in. Was it because the plaintiff’s demands were too high, or was it instead because the insurer wouldn’t respond to an appropriate demand? And what role did the insured play in the matter? Did the insured always press for settlement within the limits of the coverage, and work towards it, or was a settlement within the policy limits just something the insured requested in a token manner prior to the verdict, so as to place itself in a position to sue the insurer if things went south at trial?
There are more questions in these types of cases than one can shake a stick at, and the fun of such cases is sorting out the answers.

Insurance coverage could learn a bit from the law of ERISA, particularly from the concept of structural conflicts of interest that is so much in play in ERISA litigation at the moment. In the world of insurance coverage litigation, insurers almost invariably stand in exactly the position that ERISA decisions view as a structural conflict: they both decide the claims for coverage and pay the claims if there is coverage. And yet we don’t talk in insurance coverage about such conflicts, and this issue is never the animating principle behind judicial decisions over whether or not a policy covers a particular loss. Instead, insurance coverage law borrows from contract law, and courts purport to be applying contract principles to decide these types of cases.
But the truth of the matter is that many rules of insurance policy interpretation and many rules governing the obligations of insurers and insureds simply don’t fit comfortably within a contract law framework. Some of those rules and obligations, however, could be better understood if viewed through the prism of a structural conflict of interest analysis.
For instance, several decisions over the last few years have addressed whether an insurer has the right to be reimbursed by its insured for defense costs incurred on uncovered claims, as discussed here. Some courts allow it, with the thinking being that the insurer did not contract to provide a defense to uncovered claims, but instead only for potentially covered claims, and therefore the insurer should be paid back moneys spent on defending uncovered claims. Yet allowing reimbursement isn’t logical if the question is examined from the point of view of traditional contract law. As David Rossmiller pointed out here, the policies don’t include an actual contractual term to this effect. Moreover, it has long been, depending on the jurisdiction involved, either an accepted norm or an outright legal rule that the insurer must pay for the defense of the entire case even if only one of many claims in the lawsuit might be covered, and under any traditional approach to contract law, such a long held mutual understanding of the contracting parties would be understood to be part of the contract’s terms. Thus, I am skeptical that reimbursement makes any sense under a contract regime, which insurance coverage decisions generally purport to be part of. At a minimum, the answer to whether reimbursement should be allowed under these circumstances certainly isn’t clear from the point of view of pure contract interpretation, given that an almost equal number of courts don’t allow reimbursement as allow it, as discussed in this article.
But it may be that contract law in its traditional form simply isn’t the right framework for understanding this issue, and that instead what we want to do in this situation should instead depend on the outcome that is fairer to both parties to the contract, the insurer and the insured. And the way to figure that out may be to borrow from the law of ERISA the concept of the structural conflict of interest and apply it, and see what we end up with. If the powerful role that the insurer holds as both payor of the loss and initial decision maker on the claim affects this issue, than perhaps it is not fair to interpret the policy to allow such reimbursement, but if it does not have that effect, then perhaps it is appropriate to allow such reimbursement given that the contract terms themselves do not settle the question. Now, in most of these reimbursement cases, the insurer has agreed to pay for the defense of the insured against claims – often ones that are very expensive to defend against – that simply are not covered. An insurer that does so obviously has not made its decision due to any sort of conflict it might face as both the payor of the loss and the decision maker, because it has elected to do something in the insured’s favor, and not in its own: namely, defend the insured against a claim that is not even covered. Why would an insurer acting out a conflict do that, one would have to ask, and the short answer is that it wouldn’t. Since the insurer was not acting out of a conflict of interest, there is no reason not to simply limit the insured to what it paid for, namely the defense of covered claims, leading to a corresponding obligation to repay the insurer the money spent defending the insured against uncovered claims.
And thus a structural conflict of interest analysis sheds some light on the result that should be reached in a situation in which the terms of the policy itself, and the doctrines of contract law, can’t tell us what the outcome should be.

There is a nice and complimentary write up of this blog at Workplace Prof Blog, one of my favorite sources for a wide range of information related to employee benefits, including ERISA, such as this post on a petition for writ of certiorari arising out of a recent Ninth Circuit ruling concerning the fiduciary obligations of the administrator of an employee deferred profit sharing plan. The petition is itself interesting reading, and is available here (thanks to the efforts of the Workplace Prof), and details what the petitioner views as a split among the circuits on two specific points concerning the law of ERISA. The first is whether a plan participant can sue a fiduciary for breaches of fiduciary duty that harmed only a subset of a plan’s participants and not the plan as a whole, while the second concerns the extent to which the administrator of a retirement plan can follow, or instead must decline to follow, a plan sponsor’s directive that is not prudent from an investment perspective.
Tough choices that these types of cases present, as to where to draw the line between the sponsor’s right to operate its plan and the protection that should be extended to the participants. Perhaps the question of whether the participant can protect herself within the structure of the plan, seperate from what the administrator or sponsor does, might act as a guide post on where that line should be drawn.

Lawyers today are specialists, as evidenced by the long list of single issue law blogs listed on the bottom left of this blog (for an explanation of that list, see here). And with specialization comes what I call “without a second thought” tools, which are approaches to practice that are second nature to those in a particular specialty but of little interest and infrequent relevance to those practicing most other specialties. A “without a second thought” tool is often the unarticulated backdrop behind a specialist’s decision to proceed on a case or represent a client in a specific way, one that influences the tactical decisions made on the more front and center issues in a case. At the same time, lawyers who practice in other areas may never even give that topic a second look.
For insurance coverage litigators, choice of law is exactly this type of “without a second thought” tool, subtly and consistently influencing other decisions on a coverage dispute, as this post here discusses, but one that, as a different post reminds us, is an issue that may seldom, if ever, be of relevance to lawyers litigating in other specialties.